Corporate Governance Mechanisms and Real Earnings Management: Evidence from Nigerian Non-Financial Firms

This study examines the effectiveness of corporate governance mechanisms in constraining real earnings management activities in non-financial companies listed on the Nigerian Exchange Group. Real earnings management involves the manipulation of reported earnings through operational choices, including abnormal sales discounting, overproduction, and discretionary expenditure reduction, rather than accrual adjustments. Unlike accrual-based manipulation, real earnings management is more difficult to detect because it operates within the boundaries of generally accepted accounting standards. This study uses panel data from 42 listed non-financial firms for the period 2017 to 2023. Real earnings management is estimated using the models of Roychowdhury for abnormal cash flows, abnormal production costs, and abnormal discretionary expenses. Corporate governance mechanisms include board independence, audit committee expertise, institutional ownership, and managerial compensation structure. Two-stage least squares panel regression is applied. Results reveal that institutional ownership and board independence are the most effective governance mechanisms for constraining real earnings management. Audit committee expertise shows a significant effect on reducing abnormal discretionary expense cuts. Interestingly, performance-linked managerial compensation is associated with higher real earnings management, consistent with incentive-distortion theory. The study concludes that governance mechanisms effectively constrain real earnings management but may inadvertently shift managerial manipulation incentives when compensation design is poorly structured. It recommends compensation committee reform and expanded institutional monitoring as complementary governance interventions.

Keywords: real earnings management, corporate governance, Nigerian Exchange Group, Roychowdhury, institutional ownership.